Daily Newsletter, Wednesday, 5/30/2018

Table of Contents

Market Wrap

78 Percent

by Jim Brown

The Dow posted a decent rebound but only recovered 78% of Tuesday's loss.

Market Statistics

Tuesday's volume was 7.55 billion shares and Wednesday's declined 10% to 6.84 billion. It was still a good day. Advancers beat decliners 5,477 to 1,826 and new highs of 450 beat new lows of 112. However, the gains ended at 1:PM.

So now that we have established that is was a decent rebound, likely fed by a short squeeze, the $64 question is whether it will continue on Thursday. Since the Nasdaq and Russell exploded past prior resistance, I would expect the rally to continue unless there are some negative headlines. Unfortunately, those headlines appeared just after the close.

The White House said they were not planning on extending the EU exemptions on the steel and aluminum tariffs. The official announcement will be made on Thursday. On Wednesday, the top trade officials from the U.S. met with their EU counterparts and nothing was resolved. The S&P futures are down sharply but that could change by morning.

The Russell 2000 cemented its "exempt" from tariff status with a monster blowout to a new high. Most small cap companies sell the majority of their products in the U.S. so they are mostly exempt from the impact. A Caterpillar or Boeing can be hit hard with retaliatory tariffs and that means the big cap indexes will suffer.

The economic reports were neutral and should have been positive for the market. The Fed Beige Book showed that economic activity expanded moderately with a few changes to the pace of growth. Nearly a third of the districts reported strong growth in industry but some reported consumer spending had weakened. In some districts, manufacturing moved to a higher level of activity and transportation demand accelerated as more finished products were moved to market. Higher freight utilization increased the demand for drivers in an already tight market.

Homebuilding and nonresidential construction rose moderately. Auto sales were mostly unchanged as loan criteria was tightened. Overall employment continue to rise and businesses were forced to lower their standards for applicants. These standards included drug use, prior legal issues, lower levels of education and lower skill levels. They also resorted to offering higher levels of compensation packages in addition to wages. This is lifting labor costs and prices will eventually be passed along to the consumer.

Some companies are considering cutting back on their expansion plans because of uncertainty over the tariff issues. Any government policy that restricts international trade is going to cause a hit to GDP.

The first GDP revision for Q1 showed a minor drop from 2.3% to 2.2% growth. This is still the strongest Q1 growth since 2013. The average for the last 8 years is +0.81%. The biggest drag is consumer spending at 0.71% and the lowest level in several years. Fixed investment added 1.05 points, inventories +0.13 points, exports .08 and government .20 points.

The outlook for Q2 GDP remains strong at 4.0% growth according to the Atlanta Fed real time GDPNow forecast. With the quarter two-thirds over, this suggests the actual number should be relatively high when it is released on July 27th.

The ADP Employment for May showed a gain of 178,000 jobs, just slightly under the 187,000 analysts expected. This is slightly less than the 225,000 average in Q1. This slight slowdown in hiring is related to what I described above. So many people have been out of work for so long their skill levels have declined, their social skills have deteriorated and their interview capabilities are lacking. With 52 million people on some form of government assistance or 21.3% of the population, they have not needed to work or keep up their skills. With multiple states adding work requirements to their welfare programs, these people are coming back into the workforce but it is a tough task to find a job because their skills have deteriorated. In an ideal world, the employment growth will continue and more people will be pulled back into the workforce.

In this chart from Moody's the blue lines are ADP estimates and the green lines are the Nonfarm estimates.

The calendar for the rest of the week is busy with the personal spending and home sales on Thursday and the Nonfarm Payrolls and manufacturing ISM on Friday. The Nonfarm consensus has not changed and remains 185,000 jobs and dead center in the Goldilocks zone.

One positive thing came out of the recent economics and the geopolitical politics. The outlook for Fed rate hikes has declined. The expectations for a rate hike in June have declined from 100% to 91.3%. The odds for September have declined to 48% and December fell from 45% to 20%. These are significant declines. With the Fed recently emphasizing they are willing to let inflation run over their 2.0% target and the rate of increase in inflation negligible, the forecasts for hikes have faded. This should be positive for the market.

The earnings calendar is slowly dwindling with Costco the biggest reporter on Thursday. VMWare, Ulta Beauty, Marvel, Dollar Tree, Dollar General, Game Stop and Cienna will be the second strong on Thursday.

Dick's Sporting Goods (DKS) was the big earnings winner on Wednesday. The company reported earnings of 54 cents that beat estimates for 45 cents. Revenue of $1.91 billion beat estimates for $1.88 billion. E-commerce accounted for about 11% of sales. Comp store sales fell -2.5% compared to estimates for a -1.5% decline. On an un-shifted calendar basis comp sales declined -0.9%. The company guided for full year earnings of $2.92-$3.12 up from $2.80-$3.00. Same store comp sales are expected to be flat to a low single-digit decline. Analysts were expecting earnings of $2.92 and sales to decline -0.6%. Shares exploded higher because the trend on the chart was for a break below $30 on weak earnings. Shorts were surprised once again.

PVH Corp (PVH) reported earnings of $2.36 that beat estimates by 11 cents. Revenue rose 16.4% to $2.31 billion and beat estimates for $2.28 billion. The earnings were driven by double-digit growth in Calvin Klein and Tommy Hilfiger brands. They guided for full year earnings of $9.10-$9.15, up 5 cents on each side from prior guidance. Shares fell about 50 cents in afterhours trading.

Michael Kors (KORS) reported earnings of 63 cents that beat estimates for 60 cents. Revenue of $1.18 billion beat estimates for $1.15 billion. They guided for the current quarter for $1.14 billion and earnings of 90-95 cents. They acknowledged several brands were challenged and they were making course corrections. Shares fell -11%.

Box Inc (BOX) reported a loss of 7 cents, which beat estimates by a penny. Revenue of $140.5 million rose sharply from $117.2 million and beat estimates for $139.6 million. They guided for Q2 for a loss of 5-6 cents on revenue of $146-$147 million. Analysts were expecting -7 cents on $146.1 million. Shares declined about $1.25 in afterhours.

DSW Inc (DSW) reported earnings of 39 cents that beat estimates by 2 cents. Revenue ros e2.9% to $712.1 million and beat estimates for $681.9 million. Same store sales rose 2.2% and beat estimates for 1.9%. They affirmed full year earnings of $1.52-$1.67 but did not guide for revenue or comp sales. Shares fell 6% on the weak guidance.

After the bell, the weekly API inventory report showed a gain of 1.0 million barrels. Distillate inventories rose by 1.5 million and there was a -1.7 million barrel decline in gasoline. Platts was expecting a decline of -600,000 barrels of oil, -1.5 million in gasoline and -1.1 million in distillates. Crude fell about 25 cents to $68 in afterhours.

Markets

I know readers do not want to hear this but the majority of the gains this morning were due to a short squeeze. Whenever the market gaps higher and 75% of the gains are in the first hour with no material follow through, it is a short squeeze. Tuesday's plunge after two weeks of sideways consolidation was a nearly perfect trap for the bears. They loaded up in anticipation of a decline, added to those positions during the decline and then were slapped back into reality on the big futures bounce before the open.

The S&P rebounded right back into that sideways congestive consolidation and that is where it closed. Once back to resistance the rebound stalled. I continue to recommend waiting for a break over 2,750 before adding a bunch of longs. If you are a trader then Tuesday's decline was a gift on the long side. Oh my gosh, Italy and Spain are going to leave the euro, their governments are in a shambles, their bonds are crashing. Kings X, just kidding. Everything is ok and Itally even sold new debt on Wednesday with their 10-year yields at 2.96% and just 12 basis points higher than the U.S. ten-year treasury. Which one do you think has the most risk? Conspiracy theorists believe the ECB probably bought a large chunk of that debt to ensure the auction was favorable. The entire crash was just a knee jerk reaction and cooler heads have prevailed.

It was a great rebound on the Dow but only recovered 78% of Tuesday's loss. The index failed to move back above prior resistance at 24,700 and despite the big green candle, it is still a lower high until proven otherwise. The tariff news after the bell pushed the futures lower but they have recovered and the Dow futures are only down -20 points and S&P -3 points. There are still risks with China reportedly lining up allies in their expected fight against U.S. trade tariffs. If they can create a strong coalition against the U.S., it will cause even more trouble in the months ahead. The Dow will suffer if that happens.

The Nasdaq had a pretty good day. The index did not decline as much at the close on Tuesday so the 66-point rebound catapulted it well over the strong resistance at 7,425. The index is now approaching new high territory if it can move past 7,600. Apple was a drag after a downgrade from the Maxim Group to hold.

The Russell is going to be the Pied Piper for the market. With the strong breakout today and the Nasdaq well over 7,425, these two indexes could lead the entire market higher.

If we can get past the tariff announcement without crashing on Thursday, the market has a decent chance of moving higher. This is still a headline driven market and anything can derail it at any time. With earnings nearly over, there is far less stock news to entire investors into the market. This is the "why buy" period in the market. Summer is rarely strong and it is about six weeks before Q2 earnings. If we do not move higher this week, the odds will increase for another period of sideways consolidation.

Natus Medical Incorporated provides newborn care, neurology, and hearing and balance assessment healthcare products and services worldwide. It offers products and services used for the screening, diagnosis, detection, treatment, monitoring, and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, neuromuscular diseases, and balance and mobility disorders. The company provides computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology; and software systems for managing and tracking disorders and diseases for public health laboratories. It offers diagnostic electroencephalography (EEG), ambulatory EEG, and long term monitoring, intensive care unit monitoring, electromyography, sleep analysis or polysomnography, intra-operative monitoring, and diagnostic and monitoring transcranial doppler ultrasound technology systems. The company also provides hearing screening products to screen the hearing; diagnostic hearing assessment products to screen for or diagnose hearing loss, or to identify abnormalities affecting the peripheral and central auditory nervous systems; balance and mobility systems to diagnose and assist in treating balance disorders; and thermoregulation products to control the incubators and warmers. In addition, it offers jaundice management products to treat jaundice; brain injury products to diagnose the severity of brain injury; NICVIEW, a live streaming video for families with babies in the neonatal intensive care unit (NICU); and essential products used in the everyday operation of NICU. Further, the company provides computer-based audiological, otoneurologic, and vestibular instrumentation and sound rooms to hearing and balance care professionals. It serves hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies. Company description from FinViz.com.

If you parse that guidance along with Q1 earnings of 24 cents, only 50 cents of earnings comes from Q1/AQ2. That means they are going to see an earnings surge of $1.00-$1.10 in Q3/Q4. Since Q4 is normally their strongest quarter with hospitals trying to spend out their budgets that is entirely possible.

Natus is also gearing up for a proxy fight with Voce Capital Management, which owns 2% of the shares, and is planning on nominating board members to replace 50% of the board. Activist investors are always good for lifting the stock price.

The CEO said order backlogs are at record levels and activity remains robust.

Earnings July 25th.

Shares are right on the edge of a breakout of a five month consolidation pattern.

Buy October $40 call, currently $1.70, stop loss $34.85.

NEW DIRECTIONAL PUT PLAYS

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In Play Updates and Reviews

Good Move

by Jim Brown

The morning rebound was strong as shorts covered but the gains ended at 1:PM. The majority of stocks posted gains but all those gains were in the morning. The Dow recovered only about 78% of yesterday's loss. If we repeated the last two days several times we would end up about 500 points lower. It was a good rebound but it did not recover Tuesday's loss.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

If you are looking for a different type of option strategy, try these newsletters:

F5 will present at the Bernstein 34th Annual Str5ategic Decisions Conference on Friday at 11:ET.

Original Trade Description: May 26th

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. The company's primary application delivery technology is Traffic Management Operating System (TMOS) that enable company's products to intercept, inspect, and act on the contents of traffic from virtually each type of Internet Protocol-enabled application. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers, as well as Link Controller. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; BIG-IP Virtual Edition software platform; and management and orchestration software platform. Company description from FinViz.com.

F5 reported earnings of $2.31 that rose 18% compared to estimates for $2.26 and prior guidance of $2.24-$2.27. Revenue rose 2.9% to $533.3 million and beat estimates for $530 million. They have more than $1 billion in cash and only $328.4 million in debt.

For Q2 they guided for revenue of $535-$545 million and analysts were expecting $536 million. They guided for earnings of $2.36-$2.39 and analysts were expecting $2.26.

Earnings July 25th.

There are no August options. We either have to go with July or October and the long ones are too expensive. The Nasdaq is either going to breakout next week or roll over. If it breaks out we could see a decent run into Q2 earnings. That would lift FFIV and give us a gain before the June options expire and premiums begin to fade on July.

Position 5/29:
Long July $180 call @ $3.95, see portfolio graphic for stop loss.

Match Group, Inc. provides dating products. It operates a portfolio of brands, including Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, and Pairs. Match Group, Inc. offers its dating products through its Websites and applications in 42 languages approximately in 190 countries. The company was incorporated in 2009 and is headquartered in Dallas, Texas. Match Group, Inc. is a subsidiary of IAC/InterActiveCorp. Company description from FinViz.com.

Match reported earnings on Tuesday of 33 cents that easily beat estimates for 19 cents. Revenue rose 36% to $407.4 million and beat estimates of $386 million. Tinder, their leading revenue generator, added 368,000 paying members beating estimates for 355,000. The CEO said the new Facebook dating service should have no impact on Match because Tinder was the driving force behind their earnings and Facebook has no equivalent application. Match is entrenched and has a loyal following.

The CEO reiterated those comments on Wednesday. Bank of America reiterated a buy rating with a $46 price target.

Match crashed $13 when Facebook made their announcement a week ago. I believe the worst is over since the stock has not decline any further in a week. The close today was a post crash high.

Earnings August 7th.

Position 5/10/18:
Long September $40 call @ $3.70, see portfolio graphic for stop loss.

No specific news. MU was trading at the highest level since 2000 this morning but faded at the close. Needham reiterated a strong buy and raised the price target from $76 to $100. Stifel has a $106 target and Baird is at $100.

Original Trade Description: May 19th

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; lower power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 DRAM and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, and automotive and industrial applications, as well as for computer memory upgrades; and hybrid memory cube semiconductor memory devices. The company also provides NAND products, which are electrically re-writeable, non-volatile semiconductor memory, and storage devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; cloud SSDs; and multi-chip package and managed NAND products. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint non-volatile memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. It markets its products to original equipment manufacturers and retailers through its internal sales force, independent sales representatives, and distributors; and through a Web-based customer direct sales channel, and channel and distribution partners. Company description from FinViz.com.

The chipwreck on Friday from the AMAT earnings, caused Micron to drop -2.4%. Given its recent rebound that was minimal. Earlier in the week Stifel reiterated a buy rating and raised the price target to $101. A day later RBC Capital initiated coverage with a buy rating and $80 target. MU closed Friday at $53.

The long awaited decline in DRAM/NAND prices has failed to appear. Micron did say they thought prices would "normalize" the second half of this year. They still reported blowout earnings because prices have been high for the last year due to shortages.

Micron and Samsung, the two biggest memory producers are being smart and not flooding the market with supply as they would have done in prior years. This keeps the prices stable and they are going to normalize at a higher level.

Analysts expect Micron's revenue to grow 44% in 2018 to $29.3 billion with earnings growth of 121%. Yes, 121%. That is up from estimates in February for 40% sales growth and 102% earnings growth. At the end of 2017 analysts were expecting 26% and 60% earnings growth. Despite this monster revenue/earnings growth the stock only trades at a PE of 6. That is less than Ford for a high growth tech stock.

Update 5/23: Shares rallied after the company raised guidance and announced a $10 billion buyback for 16% of outstanding shares. They also announced a technology breakthrough on NAND memory with a 33% increase in speed.
Earnings June 21st.

Position 5/21/18:
Long July $57.50 call @ $3.85, see portfolio graphic for stop loss.